Forecasting

Forecasting is the art and science of predicting future events of business

Why Forecast?
Lead times require that decisions be made in advance of uncertain events. x Forecasting is an important for all strategic and planning decisions in a supply chain. x Forecasts of product demand, materials, labor, financing are an important inputs to scheduling, acquiring resources, and determining resource requirements.
x

Demand Management
x

Demand management is the interface between manufacturing planning and control and the marketplace. Activities include: x Forecasting. x Order Processing. x Making delivery promises.

Demand Management
Resource Planning Marketplace Demand Mgt. Master Production Planning Production Planning

Forecasting Horizons.
Short Term (0 to 3 months): for inventory management and scheduling. x Medium Term (3 months to 2 years): for production planning, purchasing, and distribution. x Long Term (2 years and more): for capacity planning, facility location, and strategic planning.
x

Principles of Forecasting
Forecasts are almost always wrong. x Every forecast should include an estimate of the forecast error. x The greater the degree of aggregation, the more accurate the forecast. x Long-term forecasts are usually less accurate than short-term forecasts.
x

Forecasting Methods
x

x

Qualitative methods are subjective in nature since they rely on human judgment and opinion. Quantitative methods use mathematical or simulation models based on historical demand or relationships between variables.

Some Qualitative Methods

Jury of Executive Opinion (opinions of a small group of high-level managers is pooled). Sales Force Composite (aggregation of salespersons estimate of sales in their territory). Market Research Method (solicit input from customers or potential customers regarding future purchasing plans).

 Delphi Method (a forecasting group uses a staff to prepare, distribute, collect, and summarize a series of questionnaires and survey results from geographically dispersed respondents, whose judgements are valued).

Quantitative Forecast Methods
x

x

x

Time Series Methods use historical data extrapolated into the future. They are best suited for stable environments. Moving averages, exponential smoothing methods, time series decomposition, and Box-Jenkins Methods. Causal Methods assume demand is highly correlated with certain environmental factors (indicators). Correlation methods, regression models, and econometric models. Simulation Methods imitate the consumer choices that give rise to demand to arrive at a forecast.

Time Series Demand Model
x

Observed Demand = Systematic Component + Random Component. Systematic Component measures the expected value of demand and consists of: xLevel: the current deseasonalized demand. xTrend: the rate of growth or decline in demand. xSeasonality: the regular periodic oscillation in demand. Random Component is that part of demand that follows no discernable or predictable pattern.The random component is estimated by the forecast error (forecast – actual demand).

x

x

World Space INDIA level Region Territory Customer All sales Industry sales Company sales Product level Product line sales Product form sales Product item sales

Ninety Types of Demand Measurement (6 x 5 x 3)

Short run

Medium run Long run

Time level

Basic Forecasting Approach
x

x

x

Understand the forecasting objective. What decisions will be made from the forecasts? What parties in the supply chain will be affected by the decision. Integrate demand planning and forecasting. All planning activities within the supply chain that will use the forecast or influence demand should be linked. Identify factors that influence the demand forecast. Is demand growing or declining? Is there are relationship (complementary or substitution) between products?

Forecasting Approach (cont.)
x

x

x

Understand and Identify customer segments. Customer demand can be separately forecast for different segments based on service requirements, volume, order frequency, volatility, etc. Determine the appropriate forecasting technique. Typically, using a combination of the different techniques is of the the most effective approach. Establish performance and error measures. Forecasts need to be monitored for their accuracy and timeliness.

Time Series Forecasting

Static
 Assume

estimates of level, trend, and seasonality do not vary as new data is observed. forecast as new data becomes available

Adaptive
 Update

Time Series Forecasting
Static x Adaptive
x
x Moving

average x Single exponential smoothing x Trend-adjusted exponential smoothing (Holt’s) x Trend & Seasonal adjusted exponential smoothing (Winter’s)

Static Forecasting (steps)
1. 2. 3.

Determine periodicity (even or odd?) Deseasonalize data Find the equation of the trend line
a. b. c.

Simple linear regression Independent variable (period) Dependent variable (deseasonalized data) Per period Index (Averages)

4.

Estimate seasonalized factors
a. b.

5.

Forecast

Find the equation of the line
x

Use simple regression
x Excel:

(Tools/Data Analysis/Regression) x Dependent variable (y) is deseasonalized demand x Independent variable (x) is period t x y= intercept + slope * x = demand Other Excel Analysis Functions

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